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Does the financial sector cause an appreciation of the real exchange rate

Nordström, Marcus LU (2011) NEKK01 20111
Department of Economics
Abstract
Abstract
In developed economies industry was once the backbone of the economy and was seen as the machinery behind economic growth. During the past decades, industry’s importance has been diminishing in advanced economies. The trend has been stronger in some countries than in others but seems rather consistent over time. Furthermore the financial sector has enjoyed vast growth since the 1980’s. In the countries where financial sector growth has been particularly strong it appears to have replaced industry as the largest sector. In this paper the real exchange rate is examined to investigate if growth in the financial sector has a tendency to crowd out industry through an appreciating exchange rate. The study is based on the framework... (More)
Abstract
In developed economies industry was once the backbone of the economy and was seen as the machinery behind economic growth. During the past decades, industry’s importance has been diminishing in advanced economies. The trend has been stronger in some countries than in others but seems rather consistent over time. Furthermore the financial sector has enjoyed vast growth since the 1980’s. In the countries where financial sector growth has been particularly strong it appears to have replaced industry as the largest sector. In this paper the real exchange rate is examined to investigate if growth in the financial sector has a tendency to crowd out industry through an appreciating exchange rate. The study is based on the framework first developed by Corden and Neary (1982) to investigate the Dutch disease. Here it is applied to a situation where the financial sector is booming instead of a natural resource sector which was the original set up of the model. United States, United Kingdom, Germany and Sweden are considered in the study. Of these countries the two former ones have large financial sectors and the later ones have rather strong industry sectors. An OLS regression is applied to investigate the relationship between the real exchange rate and relative productivity of the financial sector. However, the regression fails to prove any relationship, thereby no support for a crowding out effect could be found. (Less)
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author
Nordström, Marcus LU
supervisor
organization
course
NEKK01 20111
year
type
M2 - Bachelor Degree
subject
keywords
Real exchange rate, Dutch disease, deindustrialization, financial sector
language
English
id
2174798
date added to LUP
2011-11-07 07:36:20
date last changed
2011-11-07 07:36:20
@misc{2174798,
  abstract     = {{Abstract
In developed economies industry was once the backbone of the economy and was seen as the machinery behind economic growth. During the past decades, industry’s importance has been diminishing in advanced economies. The trend has been stronger in some countries than in others but seems rather consistent over time. Furthermore the financial sector has enjoyed vast growth since the 1980’s. In the countries where financial sector growth has been particularly strong it appears to have replaced industry as the largest sector. In this paper the real exchange rate is examined to investigate if growth in the financial sector has a tendency to crowd out industry through an appreciating exchange rate. The study is based on the framework first developed by Corden and Neary (1982) to investigate the Dutch disease. Here it is applied to a situation where the financial sector is booming instead of a natural resource sector which was the original set up of the model. United States, United Kingdom, Germany and Sweden are considered in the study. Of these countries the two former ones have large financial sectors and the later ones have rather strong industry sectors. An OLS regression is applied to investigate the relationship between the real exchange rate and relative productivity of the financial sector. However, the regression fails to prove any relationship, thereby no support for a crowding out effect could be found.}},
  author       = {{Nordström, Marcus}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Does the financial sector cause an appreciation of the real exchange rate}},
  year         = {{2011}},
}